Tomorrow’s Tape: Europe Sets the Tone

By Mark Gongloff

Everett

Economics:

2:00 a.m. to 4:00 a.m. — A slew of German data are due, including imports and exports and the Ifo Business Climate index. Given all the focus on Europe this week, these numbers could be important in setting the tone for the morning.

5:30 a.m. — Spain will sell 3-month and 6-month bills, in another test of the market’s appetite for Spanish debt.

10:00 a.m. — New-home sales data due from the Commerce Department. Economists think sales edged higher in April. Housing badly needs to put some good numbers, or at least to stop moving in the wrong direction for a bit.

1:00 p.m. — Treasury auctions 2-year notes

Earnings: We’ll get reports from …

Applied Materials

AutoZone

CompuWare

Medtronic

Other:

AIG is still hoping to price its $9 billion stock offering in the afternoon

Comments (2 of 2)

German banks lack the capital to save the PIIGS. The German banks hold too much bad debt to save themselves. The PIIGS leave the Euro, default, and German banks go under. Socialism is a sorry mess any way you try to give a free lunch to every citizen. PIIGS won't work and PIIGS won't repay.

11:21 pm May 23, 2011

It's Undertaker time wrote :

What does the latest Greek bailout mean to us in America? Why will the European Union offer yet another round of financial support? And why should American investors be concerned?

JPMorgan recently estimated the impact of "restructuring" of Greek sovereign debt on the Greek and European banks. Restructuring is a politically correct word for bankruptcy in which interest rates are lowered and terms are lengthened.

The Greek banks themselves hold $70 billion of their own government's debt, and in a restructuring, the market value of this debt is likely to fall to 50 percent of the face value, which would wipe out all of the equity in the Greek banking system, virtually guaranteeing a long and hard depression in Greece.

If that was the only issue, Europe would allow the default. But the European banks hold $72 billion of Greek sovereign debt, and have $165 billion in loans to the Greek private sector, with French banks holding $98 billion of this, and the German banks $72 billion.

In addition, the European Central Bank (ECB) has $187 billion in loans to the Greek government.

JPMorgan estimates that a 50 percent haircut here would cause losses of about $48 billion. In the end, the Greek banks would fail, and most of Europe's banks would survive, albeit severely wounded.

Here is the crux of the issue: If Greece is allowed to restructure, what is to prevent Ireland from following suit?

Look at the exposure of the European banks to Ireland: Germany, $215 billion; France, $82 billion; Great Britain, $237 billion; the ECB, $244 billion. If Greece is allowed to default, the European banks could not handle an Irish, Portuguese or Spanish default.

So, now it should be perfectly clear as to why Greece will get another aid package.

Nonetheless, this is all futile. Greece is destined to default. The non-Greek Europeans will impose austere conditions on the Greek economy in exchange for the bailout, and it is unlikely that the Greek people will stand for this for long.

Like what has already happened in Ireland, the people will eventually elect a government that promises less austerity (which means defaulting on the loans).

There are three takeaways for American Investors:

1. Because this debt crisis is not over, avoid holding stocks or bonds of European financial institutions.

2. If you hold foreign bond funds, take a look at the funds' holdings and judge for yourself if it is safe (don't count on the rating agencies!).

3. Recognize that debt and leverage, taken to an extreme, usually result in financial disaster; then look at what is going on in Washington, D.C.

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